Real Estate Deal Analysis & Advice

7 “Show Stoppers” That Keep Investors From Going Through With Rental Purchases

Expertise: Real Estate Investing Basics, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Landlording & Rental Properties, Business Management, Personal Development, Flipping Houses, Commercial Real Estate
154 Articles Written
A handsome young businessman tries to call the boss over the phone while sitting with his colleague in front of a laptop.

I was speaking to a fellow investor friend of mine today and he asked: “What are your show stoppers for rental purchases?”

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

What he was referring to were those things on a property that will kill the deal when it’s already under agreement. We had an interesting discussion on it, and I found that his list and other investors’ lists of deal killers were very different. So, let’s discuss.

What Keeps Investors From Going Through With a Deal?

Reasons to Exit a Rental Purchase

1. Condition

With regard to larger multifamilies these days, the fact is, no one is out there selling properties in great shape, where all their tenants are paying their rent on time. They’re all in rough condition. If you want a good price on something, you’re going to be subjected to properties that are in disarray to some extent or have tenant issues. Just adjust your offer price accordingly.

2. Hazards 

Hazards may include things such as lead-based paint. A lot of investors won’t touch properties that have this. But I have coverage in my insurance policy for this. We do our best to incapsulate lead-based paint, we educate our tenants, and we have them read and sign documents warning them about this issue. Unfortunately, the cost of remediating this is not economically feasible, so we incapsulate in our units to the best of our ability. Just make sure your insurance policy has a rider in there for it. It comes down to risk tolerance.

3. Aluminum Wiring

Many investors freak out if they find out a property has aluminum wiring. This happened to me. I purchased a deal that a previous buyer backed out on for this reason, but I talked to my insurance company and you can get insured for it. There are certain remediations that you do to remediate that hazard, certain outlets and switches. They way, way knock down the risks of aluminum wiring.

real-estate-disaster

4. Tenants

I consider the people that come along with a property purchase, and I consider the rent that they’re paying, but there’s other factors that I’d consider before not buying a place because of tenants. If they’re paying below market rate, that can be remediated. But the tenants themselves are not a liability. As long as there’s not some sort of zoning restriction or deed restriction—in which case I wouldn’t buy because it would inhibit how you’re allowed to use the property—this wouldn’t be a no-go for me personally. But if you have to involve court or politicians to rezone property for you, no thanks.

5. Layout

Have you heard the term “functionally obsolete”? This means that, back in the day, a 10-foot by 10-foot living room was OK. But now you’d have a major problem leasing units with really small bedrooms or living rooms. There’s something called a “rooming house,” as well. This is where kitchens and bathrooms are shared by many people. They’re not as common today, but in places where they are still allowed, I would never buy one. Only a small percentage of the population wants something like this.

Another thing I’d steer clear of is property that used to be one thing but was cut up and is not something different. It could be a single family home that was cut into a duplex or a four-, five-, or six-unit that used to be a single family home. I try to stay away from those. Bottom line, if something is immovable, I can’t work with it for one reason or another, I’m probably not going to buy it. Dollars and effort can’t change it.

Related: 3 Ways to Make a Stellar Real Estate Deal Out of an Average Deal

6. Location

If you’re thinking to yourself, “If I could pick up this property with a helicopter and drop it into a new location, I’d buy it.” Don’t. If it’s not a location you’d want to work in for a variety of factors, this is not a property for you. That helicopter doesn’t exist yet. Locations I’d avoid include those with very high crime. General crime exists. But if it’s red anywhere around the property on Trulia, I won’t do it. If you don’t want to send your people there or go there yourself, there’s plenty of money to be made in other neighborhoods.

7. Income

You need to consider your goals for the property. What’s the return you want to make? If the median income in the area is $15,000, if you do the math, someone making that income can’t afford that rent. So, look at that figure and ensure someone making the median income would probably pass as a tenant applying for your property. Again, this is an immovable thing. You can’t change it.

The Bottom Line

My “show stoppers” all have to do with things I can’t change. I can remove a bad tenant, I can repair issues with the property condition, and I can work around hazards like lead-based paint. I can’t change other factors of the property, and those are my show stoppers. Watch the video above, where I go into further detail about what they are.

Have a great and profitable week!

Do you have some “show stoppers” of your own that I haven’t mentioned?

Leave them in the comment section below.

Matt Faircloth, co-founder and president of the DeRosa Group, is a seasoned real estate investor. The DeRosa Group, based in historic Trenton, New Jersey, is a developer and owner of commercial and residential property with a mission to “transform lives through real estate." Matt, along with his wife Liz, started investing in real estate in 2004 with the purchase of a duplex outside of Philadelphia with a $30,000 private loan. They founded DeRosa Group in 2005 and have since grown the company to owning and managing over 370 units of residential and commercial assets throughout the east coast. DeRosa has completed over $30 million in real estate transactions involving private capital including fix and flips, single family home rentals, mixed use buildings, apartment buildings, office buildings, and tax lien investments. Matt Faircloth is the author of Raising Private Capital, has been featured on the BiggerPockets Podcast, and regularly contributes to BiggerPockets’s Facebook Live sessions and educational webinars.

    Antonio Coleman Specialist from Sibley, LA
    Replied over 2 years ago
    Matt..one of show stoppers I must say that will turn me off is learning about the history of the foundation. Sometimes things come up after the fact and if the foundation becomes an issue then it’s not worth being a rented property due to all the expenses.
    Matt Faircloth Rental Property Investor from Trenton, NJ
    Replied over 2 years ago
    You are Right, Antonio. Foundation issues can be very bad. We have been able to fix them, but it’s expensive. If the seller is not willing to credit for that label of repair, the deal is off.
    Ryan McCleary
    Replied over 2 years ago
    What about legal non-conforming uses? Multifamily unit that was legally built but due to more recently passed zoning laws the lot is now zoned something different (e.g., single family residential). Units on such a property cannot be expanded or rebuilt. I understand that there is insurance to cover some of this risk. Does this fall under your zoning show-stopper?
    Naren Gunasekera from Moorpark, CA
    Replied over 2 years ago
    When you say rebuilt, do you mean in the case of a fire or natural disaster? If the structure was built before the zoning law was past, that use/structure should be ‘grandfathered’ in unless it is specifically prohibited by zoning. So it usually can be rebuilt in case of a fire, etc.
    Adam Moore from Urbana, Ohio
    Replied over 2 years ago
    In my city, there are provisions for non-conforming uses that have been substantially damaged that COULD prevent the structure to be rebuilt. Make sure you read the zoning code for YOUR city, but I don’t think it’s uncommon for municipalities to require approval from a Zoning Appeals Board before rebuilding substantially damaged non-conforming uses/structures. A structure is deemed substantially damaged (usually) when the repair costs exceed 50% of the fair market value.
    Matt Faircloth Rental Property Investor from Trenton, NJ
    Replied over 2 years ago
    It does depend on your area. I New Jersey, as long as you rebuild within a reasonable time frame (6 to 12 months) you can do it even if it’s non conforming to the current zone. You have to replace the structure that was there and have to use the same footprint as the prior building.
    Adam D. Investor from Castle Rock, Colorado
    Replied almost 2 years ago
    In one city around Denver, Commerce City. There were no zoning laws or building codes until about 1990. So…. there are a number of parcels that have extra housing units which would not be allowed if built new today. We own one of them. It has 4 units on it but it’s currently zoned for only 2 units. We bought it because it was a legal 4 unit for a 3 unit price. We’ve had problems with the foundation of one of the units to the tune of $12k and as a condition of the sale, I think the seller had to come up with another $8k to minimally repair that same foundation. Anyway, for the rebuilding or repairing, make sure you have a not only good but great insurance policy so if you are down one unit, you can still sell the parcel at a fair price and make it a wash.
    Matt Faircloth Rental Property Investor from Trenton, NJ
    Replied over 2 years ago
    I wouldn’t call that a show stopper, unless I had real plans to expand the building in the future. If not, it’s “grandfathered” as it’s current use.
    Cherilyn Danzer from Hilo, HI
    Replied over 2 years ago
    Thanks, Matt. What are your thoughts on properties with unpermitted areas, such as an additional bedroom and/or bathroom? It’s very common in the towns I’m looking to invest in.
    Matt Faircloth Rental Property Investor from Trenton, NJ
    Replied over 2 years ago
    That’s not enough to chase me away from a deal. I have found that the township will typically approve the additional living spaces as long as they are not in the basement or an attic with limited egress.
    Lisa Patton Investor from Phoenix, Arizona
    Replied over 2 years ago
    What do you suggest someone do, to get stared in multiproperty rentals
    Matt Faircloth Rental Property Investor from Trenton, NJ
    Replied over 2 years ago
    Get yourself immersed in learning on BP! Check out the podcasts, webinars, and post lots of questions in the forums.
    Chris T. Investor from Downers Grove, Illinois
    Replied over 2 years ago
    Thank you for sharing Matt. What about flood zones or low lying areas? Some investors have bought them for the right numbers (with flood insurance included). Even with the right numbers, I feel that flood zones limit exit strategies and resale values. Not to mention the damage from potential floods, even with insurance coverage.
    Matt Faircloth Rental Property Investor from Trenton, NJ
    Replied over 2 years ago
    Hey Chris, I actually would buy in a flood zone, if the cash flow covered the flood insurance and I bought at a low enough discount to cover the potential discount I would need to give on a resale. Not a show stopper for me. Matt
    Renil M George from New Jersey
    Replied 4 months ago
    I like the #7, Income Aspect you discussed here Matt. That makes a lot of sense.